Unconventional Wisdom

Third, the ownership package attracts veteran managers. "We've been fortunate enough for the past six years to have good people knocking at the door," says Paul Avery, vice-president of operations. And with their many years in the trade, Sullivan, Basham, and Gannon have brought in former colleagues.

One such recruit is Larry Siegel, a 10-year Steak & Ale veteran who came on board to manage Outback's first unit. "This was a chance to make a little money and end up with something in my pocket at the end of five years," Siegel says. "After all that time with Steak & Ale, I got squat. I thought this was as close as I'd get to working for myself."

Siegel has now moved on to become a director of operations, or joint-venture partner (JVP), for a franchise group building Outbacks in Tennessee and Mississippi. JVPs, of which there are about 30, run the regions. They receive 12 weeks of training, in which they're drilled in all aspects of an Outback operation. (At the core of the training program is Outback's statement of principles and beliefs -- the mission statement over which the founders deliberated long and hard in the early days.)

It is a highly lucrative arrangement. A joint-venture partner invests $50,000, just as a unit manager invests $25,000. In return, the JVP receives a $50,000 base salary, plus 10% of the cash flow generated by the restaurants in his or her group, after the general managers are paid their 10%. It works out to 9% of the total cash flow, after expenses.

Sullivan illustrates the setup with an example of a JVP who has 10 Outbacks: "Let's say those 10 are generating $6 million a year in cash flow -- $600,000 each. The JVP would end up with $54,000 per unit, or $540,000 total, plus the $50,000 base. Then let's say that 10 years from now, the partner ends up with 25 restaurants. That JVP will probably have built an equity position of $6 million to $7 million."

With the restaurant managers and the JVPs taking close to 20% of cash flow between them, the corporation receives 80%. "It seems so foreign to people for a company to give up 20% of the deal when we're putting up the capital," says Sullivan. "But I look at it as sweat equity. It's hard work, the managers put heart and soul into it, the results are incredible, and we all benefit."

Outback's general managers are experienced restaurateurs, by and large, who need little supervision. That allows the JVPs to focus on area development -- site research for new locations and the hiring and training of new managers. "I'm not the normal district honcho who comes in and beats you over the head and leaves," says Siegel. "I'm a second set of eyes."

* * *

Decentralized Control A visitor to Outback's command post in Tampa is struck by the informality and compactness of the headquarters crew. It's just 55 people -- many in accounting -- tucked away on one floor of an office building, with neckties nowhere in sight. "It's easy to get to 5 or 10 restaurants," Sullivan explains. "But getting to these next levels is tough, and the only way we know to do it is to decentralize."

There's no human-resources department. Sullivan, Basham, and the company's other key executives hire the joint-venture partners, who in turn hire the managers, who then hire the 75 or 80 people who staff an Outback. "We believe people work for people," says chief financial officer Bob Merritt. "A lot of restaurant turnover is self-inflicted. If I hire you as a staff person and it's my job to train and motivate and develop you, I'm going to have a lot more invested than if I just call personnel and say, 'I just fired somebody -- send me two more.' "

To run a decentralized company with confidence, top management needs to trust the judgment of the troops below. That starts with the JVPs. "They're all people we've known in the past," says Paul Avery. "We know their successes, their philosophy on people, their commitment to quality."

In selecting general managers, the JVPs look for people with a good track record and superb people skills. The managers in turn are picky about whom they hire as kitchen staff and as servers, bartenders, hostesses, and busboys. Job candidates have to pass an aptitude test, which assesses basic skills such as making change at the till. (Early on, the test was given to the whole workforce, and the median result has become the baseline requirement for all hires since.) That's followed by pattern interviews, which assess judgment -- how a candidate would react in certain situations. Every applicant interviews with two managers and must be approved by both of them. A friendly and outgoing disposition is pretty much a job requirement; the company uses psychological-profile tests to help get readings on a candidate's personality. "We try to hire friendly people and teach them to wait on tables and cook food, versus hiring waiters and cooks and trying to teach them to be friendly," says B.J. Stone, a JVP with more than a dozen Outbacks in the Washington, D.C., region.

But the reason people flock to Outback is that the food is very good, the portions are prodigious, and the prices are quite reasonable. Each Outback makes everything from scratch, and the company incurs a much higher food cost than most restaurants do; in 1993 its cost of food was 39% of sales, versus 36% or less for most restaurant chains. The menu was designed by Gannon, with help from Warren LeRuth, one of New Orleans's premier chefs. LeRuth told Gannon that if he wanted to run a steak house, he'd better use high-quality meat. For a supplier, he recommended Bruss Co., of Chicago.

"We got some samples from Bruss and from some companies we used at Steak & Ale, and we did tastings at my house," Basham recalls. "After all my time at Steak & Ale, I thought that meat was meat, but there was a huge difference. So one of the best decisions we made was going with Bruss, even though it was a little more expensive." Until the public stock offering, when a second meat purveyor was added, Bruss handled all Outbacks. It supplies 100 of them now, shipping 140,000 pounds of precut choice steaks every week.

In striving to please Outback, Bruss is demanding of its own suppliers. "We tell them we want to pull product out of Schuyler, Nebraska, and Fort Morgan, Colorado, because we think that's where the best steers are coming from," says Gary Heymann, a Bruss vice-president who works on the Outback account. To smooth out the volatility of beef prices, Outback purchases a year in advance, locking in a price. Bruss follows suit with its vendors, the packing houses.

"We're buying about $500,000 worth of beef per restaurant," Gannon says. "All the beef buying is controlled from here, for company-owned stores and franchises alike." Gannon applies the same rigor to the other half of Outback's entrÃ‰es, which include chicken, pasta, shrimp, and fish. "We use chicken that's never been frozen," he says. "That's tough to do, because we distribute it nationally. We started out using frozen chicken, but it was a little tougher than we liked."

The story's the same with other ingredients. Salad dressings, for instance, are made up in each restaurant using olive oil from Italy's Tuscany region. For the Parmesan cheese that's crushed up for salads on site, Gannon has 80-pound wheels brought in from Parma, Italy. "We know where the best lettuce is, the best potatoes, the best onions," he says. "We buy from the grower, who sends product to the distributors, and they follow what we're telling them is the best produce. We didn't start out like this, but we've learned to be proactive to get the best buy."

The restaurant floor plans are designed to support careful preparation of first-rate food. A typical Outback occupies about 6,000 square feet, more than half of that in kitchen space. "We'd learned that when you put too many seats in a restaurant, the kitchen can get swamped by the requests coming in," says Basham. "So we overdesigned the back of the house and underdesigned the front, so we could execute well during our busiest times." The spaciousness helps ensure unflustered food logistics; the server should be setting down a customer's steak just as the salad plate is picked up, 12 minutes after the steak order went in.

"Chris, Bob, and I have all worked as cooks and waiters and bartenders," Gannon says. "We know what it's like to have the right equipment and the right space to produce the food. We believe that if you treat employees as if you were one of them and give them the right environment, they will blow you away with their performance."

* * *

Despite their affluent lifestyle, there's no sign that the Outbackers are resting on their laurels. Concerned about overregulation, Sullivan and Basham spend time -- and money -- on Outback's own political action committee. Basham works hard to prevent the company's bootstrapping mentality from being undermined now that capital is abundant. Gannon looks for new ways to keep staff enthusiasm high. And he's always on the spy for the next smash-hit dish. He's experimenting with lobster appetizers, and he thinks Australian lamb might work as an entrÃ‰e. "The challenge is to keep the concept fresh and exciting," he says.

Already looking to the day when Outback hits a saturation point in the United States, the company is moving into its second concept. It has entered into a joint venture with Carrabba's Italian Grill, a Houston-based company. Outback will pay the construction costs for new Carrabba's units, about $1.6 million each. Carrabba's will run the restaurants. And the two companies will split the earnings 50-50. "Outback is in its main growth thrust," says CFO Merritt, "so taking our eye off that ball to focus on a new concept wouldn't make a lot of sense. This provides a cost-effective, relatively low-risk way to get into a second concept. The new Carrabba's are doing about $2.6 million in annualized revenues, and that's well ahead of where Outback was in its first year."

There are only 12 Carrabba's for now, all in Texas and Florida. But plans call for 15 more in 1995, and a faster buildup after that. "Johnny Carrabba had been approached by a lot of people wanting to buy him out," says Basham. "He didn't want to sell, but he didn't have experience in rolling out a concept. That's what we bring to the table, along with the capital. We can help him make it a national chain." Observers applaud the venture. "It really helps Outback in an area like Tampa, where they have six or seven restaurants and they don't want to cannibalize sales," says Carlino.

Chris Sullivan, for his part, is pleased at how things are turning out. "We have at least four more years of growing Outback by 65 units a year. We hope that the Carrabba's concept will come in behind that. I'm sure there will be something else after that. And we haven't even touched on our international potential yet."

OUTBACK VERSUS THE COMPETITION

A Company of Owners

Average restaurant manager's total annual compensation:

Outback: More than $118,000

Lone Star: Up to $75,500

Each Outback manager invests $25,000 in his or her restaurant and gets 10% of the unit's cash flow, paid monthly. The average manager's annual income from cash flow is $73,600. The base annual salary is $45,000. A Lone Star manager has a base annual salary of up to $50,000 and is eligible for a bonus of $13,000, plus, after the third year of employment, stock options worth $12,500.

Sources: Smith Barney, company reports.

Return on Investment*

Outback: 52%

Lone Star: 49%

Chili's: 33%

Ground Round: 27%

Grady's: 30%

Ruby Tuesday's: 31%

Average: 33%

*Pre-rent cash flow as a percentage of restaurant investment cost.

Source: Smith Barney Inc., July 1994.

Service

Outback: Dinner only

Food Costs

Outback: 39% of sales

Lone Star: 36% of sales

Source: 1993 figures from Smith Barney, company reports.

Decentralization

Outback: One layer of management between founders and restaurant managers

Industry: Four or five layers of management between founders and restaurant managers

THE ORIGINS OF OUTBACK

Anatomy of a Partnership

The Operations Guy

Robert D. Basham, president Age: 47

Education: B.S. in business, University of Maryland

Original career goal: FBI agent

* * *

The Real Estate Guy Chris T. Sullivan, chairman, CEO Age: 46

Education: B.S. in business and economics, University of Kentucky

Original career goal: banker

* * *

The Food Guy J. Timothy Gannon, senior vice-president Age: 46

Education: B.A. in art history, Florida State University

Original career goal: art-museum staffer

* * *

The Sixties 1966 Gannon majors in art history at Florida State because it has an extension program in Florence, Italy. Works in Florence as a tour guide.

1968 Sullivan works as a restaurant dishwasher, cook, and bartender. "I got into this business trying to make ends meet as a college student. I come from a large family -- six kids -- and my dad didn't make a lot of money."

* * *

The Seventies 1971 Basham: "After college I wanted to be an FBI agent. They suggested I get some business experience first. My brother owned a restaurant in Washington, D.C., so I went to work there. I found I really liked the business."

1971 Gannon finds a job as a cook in Aspen, Colo. Moves to the Aspen Four Seasons; learns from a French chef how to prepare food from scratch. "My mother started dinner at 5:30 and served it at 6. It was full fIames, everything up high. I didn't learn anything about cooking from her."

1973 Basham joins Steak & Ale as a management trainee. Soon becomes general manager of a Steak & Ale restaurant. Later is named regional supervisor for Baltimore; Washington, D.C.; and Pennsylvania.